3 Steps to Building a Simple, Safe, “No Bank” Rental Property Portfolio

David:
This is the BiggerPockets Podcast show, 799.

Christian:
People will seller finance if they trust you, and you get trust through having a relationship. You communicate who you are and your goals. So the first rule is that you’re not coming at these people like sellers. They are owners. You’re meeting them as an owner. You want to learn from them. You’re going to find someone who is done what you want to do in the market that you want to invest in.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, and the baddest real estate podcast in the world. I’m joined today by my partner here…

Rob:
Hello. Hello, hello,

David:
Rob Abasolo. In today’s episode, we interview Christian Osgood….

Rob:
… and Cody Davis.

David:
What’s the name you gave Christian today?

Rob:
Christian Os-great. We’ve rebranded him.

David:
Yes. Today’s show takes Christian from Osgood to Oz-great great, and you will be along for the entire journey as you learn about how Christian and Cody have scaled an incredibly impressed portfolio in one of the safest ways we’ve heard, that’s almost market agnostic. You’re going to love everything about today’s show, including Rob and I’s commentary, which was probably just gushing over admiration and surprise for how well this worked. What are some things that people should listen for in today’s show?

Rob:
All of it, all of it. This was one of my favorite episodes, and in retrospect, I feel like we should have been recording these intros across from each other. I’m looking over to you-

David:
Have you ever seen this angle, like the back of my ear like this?

Rob:
No, but I like your ears, man. They are very nice. But if you want to really learn the seller financing do’s and don’ts, this episode is going to teach you how to do it. They take us through their three lesson criteria. They take us through three lessons in the world of seller financing that I think anyone, whether you’re experienced or new, if you’re getting into this world, is going to be incredibly valuable for jumping in and really surviving in this current economic climate. How do you feel about that?

David:
That’s right.

Rob:
Is that alarmist enough?

David:
It’s more big words than I’ve heard you say in a really long time.

Rob:
Surviving the crashing and impending doom economy.

David:
And if you’re an experienced investor, you will love their strategy for taking out incredibly wealthy people, getting them to lay their guard down, learning about their businesses, and then buying deals from people based on the way that they were taught how to buy deals. It’s almost foolproof. It’s simply incredible and you are going to love it. You hear it only here at BiggerPockets, your real estate investing best friend

Rob:
Live from LA, by the way, at the Spotify Studios, because we’re fancy.

David:
Looking better than everything.

Rob:
Looking better than, not as good as your ears though, pal.

David:
Thanks, man. This is the best that Rob’s ever done at complimenting me. You can see he’s trying to work through this. Hopefully he does better with his wife.

Rob:
That’s all I can do is look at the back of you.

David:
If my dog was as ugly as you, I’d shave his butt and teach him to walk backwards.

Rob:
Hold on. What is that from?

David:
It’s from The Sandlot. Geez, man. Act like you’re an American. Before we get into today’s show, our quick tip is price is not the only thing that you can negotiate. It is important to negotiate, but there is more, and in today’s show, you will learn how you can do the same. Also, please, in the YouTube comments, let Rob know that The Sandlot is a common movie that many people have watched and there’s more to life than just Interstellar. He needs to get out there.

Rob:
Hey, I’ve seen Sandlot and I like it.

David:
Then why don’t you remember that line?

Rob:
Well, I don’t have it all… I don’t know all the quotes from it. I just know, “You’re killing me Smalls,” which you are.

David:
Be less of a dork. All right, let’s get to Cody and Christian.
Welcome to the show, Cody and Christian. Nice to have you guys back. Christian was previously on Episode 605, talking about always making sure that you have new problems. It’s one of your calling cards at the time.
And Cody, you blew up BiggerPockets on the YouTube algorithm on Episode 554, and you can hear how he scaled up without any bank debt. You’re here today to talk about seller finance deals and how to negotiate terms.
For any listeners who are new here, can you define what a seller finance deal is, Christian?

Christian:
Yeah. So seller finance, if you call conventional financing, you go to a bank, you get the loan, and that’s the conventional box. Seller financing is you’re going to replace the bank with the actual seller. They have equity in the property and they can finance the equity that they have to you via a note and deed of trust, exactly like a bank would.
The interesting thing with that, though, is that you get to choose all your terms. With a bank, you have a defined package of, “Here’s your interest rate, here’s the loan term, here’s what you’re working with.”
When you’re doing seller financing, you get what you negotiate. So the great thing with that is if you need a lower interest rate to make the price work, you can do that. If you need a longer note to finish your project, you can absolutely get that.
The danger of it, you don’t have an underwriting team, like a bank, who’s going to be looking over your shoulder on that. So you have to be careful, know what you’re doing, and buy on principles that will always work for you. That’s

Rob:
That’s pretty good. So basically you’re saying with the bank, there’s not a lot of room for failure because you have things like inspections, appraisals, guidelines that basically might stop a really, really bad deal, for example. But when it’s seller finance, it’s the wild west in that capacity?

Christian:
Yeah. The positives are you get what you negotiate, the negatives are you get what you negotiate. If you do a bad job negotiating, you can put yourself in the hole, but that’s the fun piece, is you get to just adjust the inputs and you have more inputs with seller financing than you would going in the conventional buy box.

Rob:
Yeah, love it. So why are we talking about these kinds of terms today? Why is it so valuable to know this right now?

Cody:
Well, right now, a lot of people are getting shocked by the fact that rates went up quite a bit.

Rob:
A little bit, just a little bit.

Cody:
A little bit.

Rob:
Yeah.

Cody:
The beauty of it is, though, is you can do this in every business cycle. And so what people are starting to realize with the hiked rates is that this is a winning strategy. It is a winning debt product because you get to name the terms, and as you mentioned in our BiggerPockets episode, the music doesn’t stop playing this game.

Rob:
Yeah.

Cody:
You get to name the rate, you get to name the payments, and any creative structures to make your deal work. And based on the environment, everyone’s starting to realize that this is doable, it’s repeatable and it’s simple.

Rob:
Do you feel like if the seller is really flexible, almost any deal could work? Or do you think that even with the best seller financing terms, some deals just aren’t meant to be had?

Cody:
You can make every deal work to an extent, and to that extent, means that your dividends have to be positive.

Rob:
Right, yeah.

Cody:
You can buy a negative cap rate deal. We’ve done that before. If you have a positive cap rate, you can make any deal cashflow if you borrow cheaper money.

Christian:
Good example, we looked at a deal in Missouri where someone said, “Hey, I’ll seller finance you guys 108 units. I think you have a ton of upside on these. Come out and see them.” I was like, “Okay,” so I hopped on a plane. They didn’t have roofs on them, they were falling in. They were dead birds, dead on top of the dead rats.

David:
That’s the upside. If you put a roof on it, you can get a tenant.

Rob:
It’s got no top side, so there’s a lot of upside.

Christian:
And they were just in terrible areas. It would’ve cost astronomically more to knock down the building than the new building would be worth. It was just a pile junk. You can make any deal.

David:
No, you can’t make that deal work. He just has to pay you a lot of money to… He has to pay you more than it’s going to cost you to not build-

Cody:
And we talked about that.

Christian:
The price can work.

Cody:
Yeah, we talked about him letting us take it over for free and him lending us money to fix it up, and we would do the asset management. Didn’t end up moving forward because it was Missouri, and Christian was allergic to that whole state.

Christian:
Entire state.

David:
Aren’t you from Missouri?

Rob:
What do you mean? Financially allergic or the pollen is-

Christian:
Like, I walked off the plane and my eyes were burning.

Rob:
Man. Really?

Christian:
Yeah.

Rob:
Oh, Missouri’s a great place. I’m a Kansas City guy.

David:
Rob just talked someone into investing in Kansas City three hours ago.

Rob:
That’s right, yeah.

Christian:
There we go. Make sure that you can breathe there. The air is toxic.

Rob:
Hey, the allergies are important when you’re negotiating a deal.

Christian:
Yes, they are.

Rob:
Okay, but would it have actually, possibly, have worked had it not been for that?

Cody:
If had systems and boots on the ground, absolutely. But jumping into a new market, we had no interest in figuring that out.

David:
Yeah.

Cody:
You can make any deal work.

David:
Okay.

Cody:
But when you figure out you can buy everything, you get to pick and choose, and that was not a project we wanted to take on.

Rob:
Sure, sure, sure.

David:
Well, this is particularly impactful to talk about in today’s market because we’ve had a bit of a… I mean, we’ve talked about how rates have gone up. They haven’t just gone up, they’ve gone up over a short period of time way too fast. You can’t have that much instability in commercial real estate, especially when cap rates and demand for these assets are so closely tied to the cost of debt.
So when you go from 3% to 8% interest rates over a short period of time, and you don’t have enough supply, what you find is a gridlock. The sellers are like, “Nope, don’t have to sell. I’m not going to sell for less just because rates went up.” Buyers want to buy them, but they can’t because of the cost of the debt.
So you’ve got an opportunity here where people want to sell their assets but they can’t sell them traditionally. People want to buy these assets, but they cannot buy them traditionally. So what are some ways that you guys have figured out how to identify properties where seller financing could work?

Cody:
Well, they have to have equity. You can finance what you own. I’ll give you an example. We’re buying a deal right now. We just went hard on earnest money over in Walla Walla, it’s wine country over in Washington. And they’ve got equity in their asset, but we’re buying half of that portfolio conventionally, and the other half seller finance, next to no money down because all their cash is coming from the conventional purchase.
So there’s lots of ways to play the game, but you just have to identify what percentage of the deal do they actually own? What’s their equity position? They could finance that, and then you just have to break off the other piece of that portfolio and do that conventional to knock out their debt.

David:
It’s a principle that shows up in real estate investing as a whole. People that have equity, you can use creative terms. If someone doesn’t have equity in their property, all this creative stuff we talk about, there’s almost no room to play within.
So it’s one of the first questions you should always ask when you’re meeting someone off market, “What do you owe?” If you can figure out how much space you have, you now can think about how many of the different tools can I fit into that space? And that’s where you guys are really excited. You’re smiling like this is-

Rob:
Yeah, you’re smiling. I want to know what, what, it’s not the best first question?

Cody:
I never ever ask that.

Rob:
Okay.

Cody:
I never have. I don’t view people as sellers. I view them as owners, and so we don’t care about their debt stack. What we do care about is how they built the portfolio because in that story, they’ll tell us what they did. Most of the big players pay off all their real estate, though. In the multi eight figure to nine figure space, we found everyone pays it off.

David:
How do you find it if you don’t ask them?

Cody:
Well, they tell us how they built their business model. That’s how we built our business model, anyway. We learned from the players in the space that had built nine figure equity positions and they built a portfolio, they stabilized it, optimized it, and then paid it off. And so they told us that without telling us.

David:
Oh, I see. So you don’t directly ask, but you’re still finding out the information.

Cody:
Correct. I want to know the business model because the overall business model will tell us a good summary of their portfolio.

Christian:
And if someone proposes a transaction and, say, we haven’t learned that piece of their story yet, this just hasn’t come out, what they owe on it, the question is always, you go through it, you’re buying it conventionally. I just want to know what the pieces are. So I don’t want to throw out like, “Oh, well it needs to be seller financing,” because I don’t know that. I don’t know what the opportunity is.
If they put a deal out there, the question’s always, “Well, how are we taking this down? Is this going to be a bank? Are you open to carrying a contract?” And then they will give you the rest of their pieces. But that is the only question we ever ask, exactly like that.
You get through the deal, you learn the opportunity, you get through the conversation. If they propose terms, you go, “Okay, how would we do that? Are you open to carrying a contract?” And they’ll give you the rest of the pieces there, almost every time.

David:
Have you guys tried to buy any residential real estate this way?

Cody:
We’ve bought a lot of duplexes, and they still work. I mean, our qualifications are how do we buy it? How do we never lose it? If we can answer those questions, we’re set.

David:
So are they on market deals or off market deals that you have?

Cody:
Both.

David:
Okay.

Cody:
Half of our deals have been on market. We did the resort that was on the MLS as well, and then about half the apartments were off market.

David:
So when you find a person who has a duplex on the market and they’re getting a lot of interest from other buyers, do these strategies still work there?

Cody:
Absolutely.

David:
Oh, really?

Cody:
Yes.

Rob:
Okay. So tell us a little bit about that process. Are you typically looking for properties, let’s say, on the MLS, that’s been listed for more than 60 to 90 days? Or are you hitting stuff that’s fresh off the market, too?

Cody:
You can do both. And what we found, and we didn’t know this to be true in the beginning, but what we found to be true from meeting with all these owners, is the unspoken objection is they don’t want their kids to have cash, which is a big thing. And they don’t want their kids to have property because they’ll soil both of them.
So what most people want when they’re aging out of the business is a accounts receivable, just a promissory note, backed by the real estate that they can pass to their kids, so when they blow the money, they get it again on the first. We’ve just found that to be consistently true.

David:
A governor on the wealth that would be hitting the kids that would pace it out.

Cody:
Absolutely. So they get to annuitize what they’ve built, and that way the kids can’t spoil it all. They can on a monthly basis, but they will have it coming in forever.

Christian:
So it’s worth asking, no matter how long it’s been on market. Now, some of the deals right now in our current economy, it’ll come up where they have been on 60, 100 days, and everyone who’s looked at it conventionally has looked at the price. And we talked about being able to choose your terms; a common talk track right now, when you’re having that conversation and they are stuck on price is, “Okay, I don’t have a problem with your price. Your price worked last year. It works on last year’s interest rate. If we can do that, we’re good to go.”

Cody:
On a long term fixed rate contract.

Christian:
Of course.

Cody:
It can’t be short term.

Rob:
Right, so you you’re saying no balloon.

Cody:
Well, maybe no balloon. We’ve done it where there’s no balloon, but it’s not an indefinite contract. It’s a review period. So instead of it ballooning, if you hit every criteria, there’s an automatic extension.

Rob:
Nice, okay. And is there a lot of friction with that with owners?

Cody:
Typically not, because again, that unspoken objection is they want their kids to have the payments. So as long as you make all the payments and you hit the requirements, they don’t want the money. So most people in that scenario are open to it going forever until it amortizes or if it’s just interest only. We met some people that have been interest only for 40 years.

Rob:
Really? Wow.

Christian:
And that’s why the long-term is so important because, say you pay a premium for the property, but you get excellent terms, the balloon, if all your value is in the terms, the length of those terms is all the value. As soon as those terms end, you’re stuck with whatever the market has.

Rob:
Yeah, because then if you have to refi out of it, if you’re going to refi into an 8% interest rate, then it wasn’t all that great of a deal.

Christian:
Yeah, and I’ve had people look at this and were like, “Oh my gosh, I can get this amazing interest rate on this three year balloon,” I’m like, “Well, I don’t know where the market’s going to be in three years. We didn’t know where the market was going to be last year. I mean, no one expected it to be where it is today. I just don’t know where it’s going to be in three years. But I do know that in a 10, 15 year period, we’re going to have downs, we’re going to have ups, we’re going to have opportunities to change your debt stack in a 10-year period.”
So the longer that debt, the more opportunity you have, and if you get a great debt product, extend that out as long as humanly possible because that is the value in your deal.

Rob:
Sure. So let’s walk it back a little bit where you said you’re talking to this owner and then you’re saying, “Hey, that price worked, but it also worked on last year’s interest rate.” What are they typically saying in response to that? Are they saying, “What do you mean,” and then at that point you’re saying, “I’m pitching you the idea of maybe you seller finance,”? How does that conversation usually go?

Christian:
That would usually come after we’ve asked, “Are you open to carrying a contract,” but sometimes that’s just how that question comes up. They’re like, “I need this price,” and it’s like, “Okay.” They know the deal doesn’t work. It’s been on market. They’ve had everyone look on it, especially in areas like… It’s a pretty hot market where we’re at, things typically go pretty quick. If it’s sat around a while, they’re aware that there’s some problem with what they’re asking for on the property.
If you have a solution that works for them, they might say, “Yes.” It’s one that works really well when interest rates spike because the price really isn’t the problem. It is the cost of capital. It’s a soft way to put it out there, and I feel like in our current economy, I see a lot of people get yes, based on that basic question of, “Is there a way we can get the interest rate down? How would we do that?” Well, if you’re able to carry a contract, that’s a discussion we can have. Are you open to the idea?

Rob:
Yeah. So let’s talk about this because I know a lot of people are… This is really great by the way. You guys are very, very smart and you articulate your points very clearly. So I just want to ask you some of the basics here. If you’re getting something off the MLS, for example, you got to talk to the realtor, right? So what’s that like? They’re obviously the gatekeeper in this scenario.

Cody:
Absolutely.

Rob:
So what do you pitch to the realtor in order to get through to the seller?

Cody:
Well, the main thing is everyone tries to jump straight into their pitch, and that’s a flawed business model because you get through your questions and then they say, “Well, actually, I forgot to update it. Sorry, this is unavailable, it just went pending.” Especially if it’s a deal that’s going quickly. So we always start with just general availability.
We do have some questions regarding the actual asset, about what they like or mainly don’t like about the asset, but wrapping up, would the owner be open to holding a contract. And it’s a yes or no question, and it doesn’t matter what they say. They could say, “Yes,” and then we’ll proceed. And they could say, “No, but,” or they could just say, “No.” No is a full sentence, so they could just shut it down.
Regardless of what they say, when we’re wrapping up the phone call, typically this is the first time I’m speaking to this real estate broker or the agent, so I’m going to say, “Is this the deal that we should start a relationship on, or is there something else that I should know about before making a decision?” And that’s how we wrap up the phone call.
Not every deal will come together. Not everybody can seller finance it. You can always get creative, but just because you can, doesn’t mean you should.

Rob:
Right.

Cody:
Simplicity matters a lot. And so I let them know that I’m interested in the asset, but if they can’t swing it, then I want to know if there’s something else that I should look at.

Rob:
Yeah. That way it shows at least good faith that like, “Hey, I’m really not here to waste your time on this. If you got other leads, let’s talk about those.”

Cody:
And it positions me as a logical buyer, and if you can become a logical buyer, you can get terms no one else can get.

Rob:
Very cool, very cool. So tell us a little bit about your personal experience doing this. What does your portfolio look like these days? Because I’m sure you’ve had a lot of growth since the last episode you were on.

Christian:
Yeah. So we started catching everyone up, if you haven’t seen the episodes yet. We started off primarily in Moses Lake, Washington, and Grant County, so the surrounding cities we’ve expanded to.
The first deal that we ever did together was a 38 unit building. Prior to that, Cody has done two twelves and a six. I had two duplexes. That’s where we partnered. Today we have, Cody’s our numbers guy, but we’re in the ballpark of about 130 multifamily units, under contract for another 60 and a 20 unit resort.

Rob:
Where at?

Christian:
That’s on the Hood Canal. It’s in Union, Washington. It’s a population of 1000, but gorgeous location, foothills of the Olympic Mountains. It’s fantastic. And, of course, purchased at seller finance off the MLS.

David:
How’s the resort work?

Christian:
The resort works with a lot of manual inputs. The project there, actually, the owners lived onsite, no matter who owned it. It’s passed hands, and I think we’re the fourth ever owner of it, for 88 years, they lived onsite and managed the resort.
When we came in, I’m not going to live in a town with 1000 people. I love it over there, to visit. So when we set this up, we had to build systems. So this first year, it’s been really intensive, finding the right staff, the right team, systemizing things that have never really been optimized. We’re just about to the point now where it’s really running smooth, but that was-

Rob:
Yeah, but something like that, I imagine, do you have an onsite caretaker that’s running it full-time?

Christian:
Yep. We have a onsite director, onsite head of maintenance, and then we’ve had to build staff around their needs. And a lot of it was figuring out, it’s trial and error. We put a team together and we’re like, “Where are the holes,” and there’s always something off. Keep tinkering with it. I think we finally have the team that works. If you’re looking to get in hospitality, don’t start with a small resort. It’s a huge project. I think it was overall a distraction from our multifamily, really profitable, a really fun project, but it was a fun project.

Rob:
Yeah, glad you did, wouldn’t necessarily do it again kind of thing?

Christian:
Exactly.

Rob:
Okay, cool.

Christian:
Super glad we did it. We learned a ton. I would not recommend that as a business strategy. If you’re investing in multifamily and you’re two years into your partnership, stay in your lane for the first five years.

David:
So it’s 20 different properties that rent sort of like a hotel?

Cody:
They’re cabins.

David:
Okay.

Cody:
So it is a cabin getaway. It’s on the Hood Canal. We’ve got the front dock, unobstructed water views from some of the rentals.

David:
And then you have a pool and a spa inside, or what are the other amenities?

Cody:
Everybody’s got just about their own hot tub, and then it’s in the woods.

David:
So you bought 20 vacation properties?

Cody:
Yep.

David:
Okay.

Christian:
Glamping.

Rob:
Nice, yeah.

Christian:
You would love it.

Rob:
Yeah. So tell me this, I mean, it seems like the idea of terms and really creating the term sheet and a deal that works for both of you, love the idea of it. Is it pretty tough in all actuality, when a lot of the people that are selling these properties are mom and pops with not updated books, and their books are written down on a napkin and their filing cabinet? How often is the actual business organization of the seller a problem for negotiating this type of stuff?

Cody:
Most people, even if they’re mom and pop, have bank statements, and I can always refer to that. There’s been maybe two people that didn’t, out of the whole portfolio. So most people at least have bank statements and I can go through that and verify just income and general expenses.

Rob:
Is that a bit more of a daunting or scarier task knowing that that’s all they have, versus going to someone who’s a little bit more polished or do you not mind?

Cody:
Well, I mean, it’s only an issue if you don’t see the value and the opportunity. If there’s enough value, if you can just look at the numbers, income less expenses equals cashflow, and if you can get enough cashflow off the bank statements alone, phenomenal. If you can’t, negotiate better debt products.

Rob:
Okay, awesome. Well, I want to get into this because I know that you’ve broken this process down, the seller financing process, down into three basic lessons, right? So can you walk us through those? I guess let’s jump into number one here: Tell us, what’s the first step or what’s the first lesson when getting into this world?

Christian:
Yeah. So the first and most important difference in mindset is people will seller finance if they trust you. There’s a lot of complications if they don’t know you, have no idea who you are, and there’s something that you say where they go, “Huh, I want to do a deep dive into everything about them.”
You want to get trust and you get trust through having a relationship. You communicate who you are and your goals. So the first rule is that you’re not coming at these people like sellers. They are owners. You’re meeting them as an owner. You want to learn from them. You’re going to find someone who has done what you want to do in the market that you want to invest in. You’re going to build a relationship with them by just authentically having a phone call, going out to coffee, communicating, “This is who I am, what I’m trying to build, and why I’m trying to build it. Tell me about your business.”
Good example: I started with a duplex. The next thing I did was call people with 12-plexes right down the street, “Hey, I’m your new property neighbor,” relatable point, “I’m trying to retire my wife, and my 10-year goal just became a one-year goal,” and most people laugh and they’re like, “I totally get that. She’s a kindergarten teacher. This makes sense.” “How did you scale to 12-plexes? I haven’t gone that big yet. I’d like to learn how you built your business.”
I mean, it’s a super easy conversation. It’s authentic. I do want to know. I never ask them to sell their property. And that difference between how I think a lot of people are doing it, just hammering the phone, “Hey, would you accept an offer? Hey, would you accept an offer,” you’re much less likely to get to negotiate your terms if you don’t have that relationship. And so I think that’s the first rule is they are owners, not sellers.

Cody:
And really what that means is as soon as they become a seller, it’s a transactional view. If you view them as an owner, there’s an opportunity to build a relationship because people that own real estate know people that own real estate, and that’s how you start building these relations.

Rob:
So tell us about the timeline of this, because it seems like it’s like the long game. So you call someone and, “Hey, I’m really interested in getting into that particular space. I’d love to buy you coffee and chat with it.” They’re probably going to be flattered, because not a lot of people in their life are probably all that interested in real estate. And then you ask and they tell you about the property, and then at what point are you like, “Yeah, so anyway, yeah, you want to seller finance it to me?” What is that transition and that timeline?

Cody:
Everything that we’ve done on market and off market has been under four years. I met him about three years ago and we partnered two years ago. We went from, I had 30 apartments and he had four, to now 130, about to be 190 and a resort, and that was in two and a half years, max. I think we partnered a little over two years ago.
So it doesn’t take forever, a couple years at the investment game is not a long time. The quickest relationship from an actual call, coffee meeting, transacted in about a month. And one that I was working on well before I met Christian took over two years. Still absolutely worth it because today, they still help me out.

Rob:
When you say it takes about a month, can you walk us a little bit through what does that look like? Is it like you have the coffee, you text them questions? At what point are you comfortable enough to really broach the subject of making an offer?

Cody:
We have this thing, oh, we don’t ask for an offer. They usually present it, but what we’ve mapped out is there’s a way that you build rapport at the highest level, and we call it the circle drill, and there’s three sectors: you’ve got relatable points, which is your past. People relate to you based on your past, and they’ll want to meet with you based on that. So that gets you to the coffee meeting. Goals, sector number two, gets them to want to meet with you and work with you. And then that last piece is significance, what changes for you when you hit your goals? Not while you’re doing what you’re doing, but what actually changes when you hit the goal?
And that is what creates buy-in, and that buy-in, at that point, once you’ve mapped that out for yourself and you’ve mapped out theirs, typically they offer to sell you assets.
And so if you can get through all that in a month, which is what I did on one of my relationships, they offered to sell me an asset in a month, and I bought a property. Some of them took a long period of time, because it took two years to get to the coffee meeting. They just were too busy.

Rob:
So it’s effectively, you’re really just trying to take as many of these calls as you can, building your deal flow and eventually, hopefully, all those leads start to kind of come to fruition and actually, I don’t know, offer to sell you one of their places, right?

Cody:
Yep. You build a sphere and you just try and keep it simple. You go in with an objective and walk away with a takeaway, and that leads into number two, rule number two is simplicity matters. When it comes to actually buying the real estate, how do you buy it? How do you never lose it?
We learned that through all these owner meetings. When we’re meeting up with these property owners, they taught us how they bought all their real estate. The beauty is they taught us how they bought their 12-plex, now I know how to buy that 12-plex. As we build the relationship, our rapport grows, it becomes a very easy transition. I become the most logical buyer, and now we do, for all their assets because we know how to buy those specific assets.

Christian:
Speaking of simplicity, the more simple it is, the more repeatable it is. We transact roughly every 45 days. That seems to be the trend, so a lot of consistency. We do the same basic thing. If you’re getting started, this is how I do it: if you make five calls in a week to owners in your market, so this is a very targeted, I’ve looked at people who own properties around where I want to buy, who’ve done what I want to do-

Cody:
On Google Maps.

Christian:
… on Google Maps. You can find them totally free. No skip tracing, you can just Google them. You find the people, five people, so you’re going to make five calls in a week. One of those people has to accept a coffee meeting with you.
Assuming that you take two weeks off, you’re going to meet with 50 owners in your market. If you meet with 50 owners in your market, learn how they played the game and communicate in 30 seconds or less, “This is what I’m trying to do and why I’m trying to do it. How did you build your business,” and you have an authentic conversation with them, the deal flow will come.
That is a lot of people who are invested in helping you, who you have spent time with. Some of those will be a 30-day turnaround, some of those will be a five-year turnaround, but when people are invested in helping you, there could be a deal that comes up, The Robin Hood, it’s on market. That was actually one of our friends who we’d met in the real estate space, we’ve done an owner meeting with. It was the wrong deal for him and he called us. He’s like, “You guys are young, you guys want to work really hard. I found a property that makes a ton of money and I don’t want to work this hard. You guys should take a look.”

Rob:
That’s the resort, the Robin Hood?

Christian:
That’s the resort.

Rob:
Okay, cool.

Christian:
That’s how that came up. But those relationships, I never asked to sell, I asked him to sell his stuff. He has a duplex in a city that I don’t want to own in. That wouldn’t make any sense. But the relationship yielded, to date, our largest asset.

David:
I can see a psychological benefit you have here, because if it’s a stranger that’s coming to you to buy your thing, you’re going to be looking at them as some form of an adversary, “You want to get my thing as cheap as you can. I want to sell it as much as I can.” You’re in a conflicting situation-ship.
When you say, “Tell me how you build your business,” and they say, “Oh, you always pay 80 cents on the dollar, and you always make sure you have this much in reserves, and seller financing makes it work,” and they give you the playbook and now they like you. How are they going to, in good conscious, come after and try to get as much money from you as they can? In a sense you’re like, “Yeah-

Rob:
Because they know that you’re trying to build your business.

David:
And they’ve already taken a liking to you and taught you what they did, so now they-

Rob:
They want to see you win.

David:
… they have to offer it to you, and they don’t have to, of course, but psychologically speaking, they will feel obligated because now you’re a friend, not an enemy, to say, “I’ll give it to you on the terms I taught you that you should buy.” It’d be almost be like if you had a mentor who said, “Always pay the 1% rule, always buy on the 1% rule,” and then they want to sell their property and they go to you and you know you’ve been trained by them to only buy on the 1% rule. They’re not going to ask what’s market value, and if they do, you’re like, “Well, based on your 1% rule thing, if I had seller financing, it would work the same way on these numbers.” You’ve avoided that entire Death Star shielding that they’re going to be putting up to protecting what they do.

Christian:
And they’re so excited when you pitch their terms back to them. They’re like, “You got the concept. Yes.” I mean, it’s exciting. It’s a win.

David:
It feels emotionally rewarding.

Christian:
Yeah.

David:
So now they don’t have to win financially as much to still be happy.

Christian:
Exactly.

David:
Especially if they own a property free and clear. Practically speaking, getting every single dollar they can isn’t as important.

Christian:
And if they happen to be seller financing to you, you want the person seller financing to be on your side. You want to be aligned, you want them to feel like they got a good deal. If you have someone who you’re writing a check to every month who hates you because they feel like you ripped them off, that’s an awkward relationship.

Cody:
And then, I guess, the last piece that we really have here is on that simplicity note, order of operations always is deal, then debt, then equity. People get this out of order all the time.
If you want to buy real estate, it’s not, “I need to find seller finance deals.” I need to find deals that I want to own. I need to find properties that I see on Google Maps or I see in person that the only way they could be better is if they have my name on title.
When you find that asset then you find the debt product. It’s not the seller finance game. I know we’re talking about that today, but if you want to own real estate, you need to find the deal you want to buy, and then the debt that allows you to cashflow on long-term fixed rate controlled pieces. We don’t use variable rate debt for that reason. A lot of people got a little bit burned on that recently. So deal then long-term fixed rate debt, and then you have to figure out the down payment, and that can also be debt if you have enough cashflow.

Christian:
Now a lot of people try to, at least I’ve seen a lot of people, try to raise the capital first and if you do that strategy because a lot of people buy that way, if you do that strategy, you don’t get to line up your debt product to your deal. So if you’re doing creative finance and you set your own terms for your debt before you find the opportunity, you’re going to limit the opportunities you can go after.
I have found that most people have a harder time finding the deal to put the capital to, so do the hard part and then line up the capital, whether it’s debt or equity. You customize all your terms to make sure that it works for the opportunity that you have.
I think that’s been a huge part of Cody and my success in consistently doing deals. We keep it very simple. We’re asking question… A basic question is, “How do I buy it and how do I never lose it?” It’s buy and hold. The answer to that is exactly like you said, it’s deal, then debt, then equity, always in that order. You follow that equation, that is an opportunity. Debt and equity is all the financing. When you have a fully funded opportunity that works, cashflows, long-term fixed rate debt, you are done, you own a property.

Rob:
So you keep saying, “How do I buy it and never lose it?” What does that mean?

Cody:
Well, if you figure out how to buy a bunch of real estate, that’s really cool, but most people can figure out how to buy it, but they can’t figure out how to hold it. They got to flip out of it, they got to self-syndicate to get cash out, they end up doing really expensive debt to try and hold it and eventually lose it. And there was a group in Texas that everyone saw that lost 3,200 units. There’s a lot more people like that. They can’t figure out how to hold the real estate forever.
And so what we’ve found from the big players is long-term fixed rate debt with cashflow margin and a way to pay off the obligation before it’s due. If you can figure that out, you’re done. That’s why we have debt payoff, our debt hammer, stage four of our business cycle, but most people, they want to scale indefinitely and they don’t have any metrics around margin.

David:
I can see a pattern in what you’re picking up here. So the traditional method would be I need to make 20% to put down on the next property scale. In order to get 20%, I have to either get a ton of equity in the deal or I have to take all my cashflow and put it towards the next deal, or I have to raise money.
If you raise money, you’re probably going to be borrowing debt to buy the asset, which puts you on the musical chairs game, which is what we’re finding now, is rates have gone up at the same time balloon payments are starting to come down. It puts any commercial operator in a very tough position, because they could have increased the NOI in their asset, they could be doing great, but if their balloon payment is coming due and rates have gone from 3% to 8%, it’s not going to debt service at today’s rates, now you have to sell it. Well, the person buying is buying it at 8%, so now they have to pay less, and even if you did everything the way you were supposed to do, you still lose the asset.
You’re describing a way of buying it that takes you out of the position where you’re in the musical chairs game. You don’t need the money for the down payment because you’re negotiating terms from the seller where there’s going to be less money down. You don’t worry about what interest rates are doing in the agency debt because you’re buying it on fixed rate. Is that what you’re describing? Am I getting it right?

Cody:
Absolutely. And the whole premise is a solid business strategy does not change if the market changes.

David:
Based on market conditions.

Cody:
Right. It should be able to work in any given market. Now people will lose real estate regardless of what strategy they use. Some people just buy too much too quickly. It happens and people go bust, but solid principles can help mitigate that risk.

Rob:
Yeah, okay. So you’re talking about negotiating these longer terms. What do you consider the minimum term for most of the deals that you’re going into?

Cody:
Well, it depends highly because we’ve done three-year debt products, but one month of income could knock out a bulk of the mortgage, the total debt. They’re small deals. On bigger deals, we want 10-years plus. We know that we can pay off any single mortgage we have within 10 years, just out of cashflow. In the beginning, we couldn’t do that.
So my first deal was a 30-year fixed rate mortgage, no balloon. That was on my 12-plex. I knew I could pay that off before it was due because the real estate would pay for it if I just made the mortgage payment. So then what we have to look at is your debt coverage ratio and for us, we like to see if my mortgage costs $10 grand a month, my net operating income has to be $15.

David:
So you’re looking at a 1.5 debt service ratio.

Christian:
That’s the ideal.

Cody:
Now we got a lot of stuff over two, which is more ideal. Every month, we can save an extra mortgage payment, but that’s stabilized. Most people aren’t going to get that day one unless they get really cheap debt.

David:
So how often are you buying properties that need some serious work to stabilize them? Is that part of where the deal’s coming from, or do you feel it’s more the relationship and it’s not the deal itself is a problem?

Cody:
The relationship is always senior to the real estate and that’s what, again, the buy-in from the significance allows us to get better terms than other people. We’ve done a couple value-add deals where we’ve had to put over half a million bucks in reno. Our 38-plex, the first deal we partnered on, and we were funneling over $50 grand a month into rental renovations for quite some time, and we passed well over $600 grand in reno on that one. We had to do that out of cashflow, so we were super negative on the portfolio. All of our cash went into it, but we don’t like to do that on every deal. We like most deals to be based on cashflow, day one, for equity growth, so we have to cashflow day one, and that one definitely didn’t.

Christian:
So we had to build a portfolio that cashflow-ed around it to support the reno, and away you go. You can’t take your global cashflow to zero because that’s the fastest way to lose.

Cody:
Which is why we bought all our units. I mean, we bought, I think, four or five deals within four months when we first started so that we had the cashflow to fix stuff.

David:
I refer to that as a portfolio architecture, I talk about, if you’ve built up cashflow from properties, you can take on something else that has a high upside but won’t cashflow right away, or you can buy properties with minimal cashflow, but a big equity position if you have a strong cashflow from something else. Then when you do build up that equity position, you can sell, you could take that money to pay down debt, and now your cashflow is even higher.
I don’t want to say it allows you to take more risk, but it does allow you to have more flexibility with different deals when money’s coming from somewhere. And I think people make a mistake when they look at every property as a standalone entity that doesn’t relate to all the other ones, because your portfolio’s like a breathing organism that has all the pieces. My hand isn’t the same as my foot, but my foot controls where my hand can go. And so when you look at it like you’re saying, I think you guys see opportunities that someone wouldn’t hit when they’re just looking at a calculator, “What’s my cash on cash return? Yes or no,” and then they move on to every single thing individually.

Christian:
Yeah, you want more pieces on the board so you can adjust your pieces. It’s like a board game.

David:
There you go. That’s a good way of looking at it.

Christian:
The more cards in the deck, the more combos you have. One thing, for everyone listening if you’re newer, that is a tactical mistake we made, is we bought the cash negative property early and then built a cashflowing portfolio around it. Just because it worked doesn’t mean that that is a good strategy.

Rob:
Right. You made it work.

Christian:
It did well.

Rob:
Russian Roulette will work four times out of five or whatever.

Christian:
Exactly.

Rob:
You don’t want to play that game too much.

Christian:
Exactly. The right way to do it if you’re starting this is you buy those four or five cashflowing properties first, then you buy this deal where the properties can sustain it. That is the correct order of operations. For everyone listening, being like, “Wait, didn’t they say to buy on cashflow?” Yes. That is why we learned that.

David:
Well, you said earlier you had a friend that would earn his snack; he wants to eat something bad, he’s got to go do some exercise first, right? You take on a challenging project like the one you described, and you dump $50 grand a month and it’s stressful and you’re, “Oh, we got out of that.” Well, assuming that that deal now has a lot of meat on the bone and is very profitable, you’ve earned the right to either take some time off and buy easier deals or take on another challenging project sheltered by the one you just did.
That is the benefit of that perspective of, “I’m going to earn the right to do something,” as opposed to, “I’m going to go raise a bunch of money from other people who don’t know any better as a syndicator. I’m going to throw it all into a deal,” even if you hit it right, that’s one of the things that concerns me with this market, is you see properties that operators literally increased their NOI, raised rents, did a great job, and they’re getting hammered because when the music stopped, there just didn’t happen to be a chair there on the refinance.
I know that business isn’t fair, but it feels unfair that you did nothing wrong, and just the way that the market worked out because of the balloon payment system, you’re getting hammered. What you guys are describing is like, “Yeah, we’re not going to play that game. You guys all walked that gauntlet. We’re going to go all the way around here and take a lot longer and buy a lot more coffee and eat a lot more pie and eventually we’re going to end up in a position where we’re not taking the risk that everyone else is.”

Christian:
Yeah. Well, we have the benefit of being on the backend of a really, really, really long market run. So when we’re looking at this, everyone since, I mean, 2015, has been like, “Oh, it’s the top of the market. It’s the top of the market. It’s the top of the market.”

Cody:
And we’re not addicted to just making money.

Christian:
Exactly.

Cody:
Because we hadn’t been making money hand over fist like everybody else.

Christian:
So when we’re looking at this, I’m like, “Well, everyone’s been saying it’s top of the market for the last half decade. At some point, it actually will be the top of the market and it will go the other way. Let’s build a business model where we can continue to get paid to wait for market cycles to change regardless of where we’re at.”

David:
And ideally buy some of those properties from the people that are in a position where they have no other option.

Rob:
At low percent interest rates, especially if you’re doing subject to assumptions, all that kind of stuff. I’ve got a few in my pipeline right now that are 3%, 3.5% and they’re just trying to get out because they know that they can’t sell it at the 8% because no one’s going to buy it at that price. And I’m like, “Phht.”

Cody:
But that’s not feasible. Those strategies aren’t-

David:
It’s commercial real estate.

Cody:
That’s not super feasible on those bigger deals.

Rob:
On commercial real estate?

Cody:
Yeah. And the people that are going to struggle are not the people you’re going to buy seller finance from because all the affluent people have equity. The people that are struggling aren’t going to be in a position to give you great terms.

David:
No, but if you’re in a very strong financial position with your own portfolio and somebody’s in a place where they have to offload something and you can’t buy it, you’re not going to be able to take over their low rate because they don’t have a low rate. That’s why they have to sell because their payment is coming to you. But the position of your portfolio can allow you to cross-collateralize.
You keep mentioning these options that you have when there’s space. The equity in your portfolio will allow you to go absorb some of these assets that someone else would not be able to. They’re toxic to the operator who bought it wrong.
I can see this could be a medicine that will be sorely needed in the commercial space because when things have been easy as they have been, it has been turbocharged commercial real estate investing for eight years. It’s one of the reasons I didn’t do much in that space because we can argue over why, but my perspective is we printed way too much money. That money needed to find a home. We kept on lowering rates. It was easier than ever to go raise $50 million, and then you could then leverage that so you could turn $50 million into $250 million and go buy one asset that a property management company could control and two people could control $250 million worth of business, which you couldn’t do in… You can’t go buy a $250 million company and manage it with two people.
It was like the golden era. Everything was perfect for commercial real estate, and now we’re seeing that the music is stopping. You’re seeing a screeching halt, the Houston operators losing their deal. You’re going to see more and more and more and more of this, big developers running out of time.
The syndication model worked great when there was wind at your back and it was just making everything easier, and it covered a lot of the stink. The syndication model is now getting exposed because of one stupid, tiny little change, which was just rates. It wasn’t like we have massive vacancy. It’s not like we’ve hit a economic recession. You’d expect those things to cause a crash. I don’t know many people that are struggling with vacancy. Occupancy rates are still high. Rents really haven’t come down a lot. It’s just that one tiny piece, like the hinge that moves the door. It’s such a small piece, but it controls where the door moves.
Your guys’ model is basically like, “We’re just going to get rid of the hinge if that’s where all the problems are coming from. Our doors are going to be fine.” Is that how you see it?

Cody:
Well, why keep the problems if you know how to get around it?

Christian:
And the timing just happened to be perfect. We started a year before rates changed. We look like heroes, but I mean, we just talked through, “How would you own it and how would you not lose this?”

David:
Actually, that came from the people you talked to.

Cody:
Yeah. There’s a logic test. The people that have been playing the game for 60 years are probably better off than the people that have been playing for five or 10. And all the people that have been playing for five or 10 are saying, “Get your variable rate because you’ll cashflow more. You can buy the lower cap rates because your cost of capital is lower, and you can own a bunch more real estate,” and it works till it doesn’t. All the people that have been playing the game for decades, they’re just laughing at them because they own all their stuff in cash.

David:
It’s funny, though, you guys, your model exposed you to those people. Those people are not coming on podcasts like this to talk about their model.

Christian:
No.

Cody:
They never would.

David:
No, you don’t even know who they are. They’re wearing overalls and they’re driving their tractor and they own $100 million dollars worth of real estate that’s paid off. They’re not running to go be on TikTok and tell everybody else about how to make a whole bunch of money.

Cody:
I met a guy who owns 900 units within miles of here, and you’d never know, and he’s less than 20% leveraged, playing the game at a really high level.

David:
Can you imagine-

Rob:
That’s crazy.

David:
… how nice would it be to be that guy, and not have to make TikTok reels?

Cody:
They’ve been doing it forever.

Rob:
Although, he probably would make the greatest TikTok reels, honestly.

Cody:
And he respects debt, which a lot of these people that are getting into the game don’t do. They don’t respect the leverage. They lever deals that they own with equity to buy more deals, and they don’t respect the relationship between the money that they’re taking on and the money that they actually have.

David:
That’s a great point. Debt lost, I don’t know how to put this, maybe before I even talk about debt, money lost its value when it comes in so easy. When you go from making $4 grand a month to $100 grand a month, you lose respect for money. There’s no way around it. It’s very difficult to have the same respect for how much money costs when you used to have to work 400 hours to make that, and now you can make it in five. You just start spending money on dumb things and you see this happen all the time. Why does someone need a Bugatti or a McLaren when a Mercedes would’ve been just fine? Because they can. That’s literally the only reason, right? You lose respect for money.
Well, I’ve noticed that happen with debt. When interest rates are 9%, 10%, which, frankly, that’s what I would need to let someone borrow my money. I wouldn’t let you borrow my money at 3% for 30 years at a fixed rate. That is stupid. But when the government offers that, we’re just like, “Yeah, I’m going to go buy a house worth $600 and I’m going to borrow $550.” I don’t think about, I’m borrowing $550. I think about, I have $50,000 in equity that I didn’t have to my net worth. That is the way it appears to your brain.
When the cost of capital rises this quick, the emotional relationship you have with debt changes drastically. You’re like, “This is now an anchor.” And it’s funny because I’m remembering in 2010 when I started buying real estate, nobody was excited about owning real estate. You did not hear people like, “Yeah, that’s great. I want to go buy a bunch of houses.” Buying a house in 2010 was just taking on a mortgage that you were stuck with. It was like marrying a girl you didn’t like. That’s what that was like. It’s like, “I have all these obligations and she’s not even pretty. I’m not excited about it.” That is how people looked at real estate.
I think there’s a very good chance that we’re heading back into an era like that. We’ve all made fun of Dave Ramsey a little bit for his whole, debt’s bad and you should never take on debt.

Rob:
Stupid.

David:
You may see a resurgence of that coming back as you see people get burned from some of these decisions.

Cody:
I love a lot of his business principles though.

David:
He’s a smart guy.

Rob:
Yeah, yeah, of course.

Cody:
He’s very intelligent.

David:
A very smart guy.

Cody:
That’s why we’re paying off all our stuff. We’re going to pay off all our real estate.

David:
Yeah. I think that you’re going to see the wisdom in what Dave Ramsey’s been saying when before, when the government’s printing money in quantitative easing and we’re just throwing business principles out the door and it’s just like a huge party, it doesn’t make sense that he’s the one person saying, “Don’t take on debt.” I understand the criticism, but now that the relationship with debt is changing, you said something, what was the word that you said? Was it lost respect for debt?” Is that what you said?

Cody:
People don’t respect the relationship with debt.

David:
You don’t think about, “I have to pay back this money that I borrowed.” You just think, “I just have it and it’s going to become worth less and less. The debt’s going to become worth less and less over time.”

Cody:
Yeah, I mean, you have your five metrics in real estate. You got your cashflow, appreciation, depreciation, debt reduction, and debt devaluation, and that’s what everyone was betting on, debt devaluation. But you do have to have cashflow to service the debt so that it can get devalued.

Christian:
One of the first things our accountant ever told us was, “All this debt you’re taking on, you do realize that you do have to pay it with money. At some point, you have to earn the money to pay it off.”

Cody:
Now it’s funny, but-

Rob:
Checking in, you do have to pay for that.

Cody:
… but most people don’t build a model where they can. They have to buy bigger deals to get bigger fees to buy out of the little deals, and then they can’t get out of the big deals unless the market carries them up to where they can exit. It works till it doesn’t.

David:
Yeah. And I think if you get fixed rate debt, that changes everything because you can get cashflow to pay back the debt.

Cody:
For a long enough term.

David:
Right.

Cody:
If it’s not long enough, it doesn’t matter.

David:
Yeah. It’s the adjustable rate debts on short-term balloon payments, and then no one saw it coming, that rates would just come up out of nowhere this quickly, right? Common sense did not let anyone know. I mean, look at banks that went under because they bought too many bonds. I can’t stop thinking how insane… If a Martian came to Earth and we said, “Our bank went under,” and they said, “How? Did you give bad loans to people? Did you not do due diligence? Were you giving out loans to tech companies that had bad business models?” “No, we just bought too many bonds. We ate too many vegetables and we got food poisoning. We needed more sugar.” It just doesn’t make sense, but that’s what happens when you raise rates this fast, and it’s sort of rippling through real estate now.

Rob:
Yeah. Well unfortunately, I think we have to come to a close, but this is perhaps… I mean, this is such a good… We could literally do this for hours at this rate.

David:
Your guys’ model is so sound and you’ve articulated it so well that you didn’t have to keep talking. In 20 minutes, you made an air tight case that couldn’t be argued, and then Rob and I, well, mostly me, just spent a bunch of time talking about how great it is.

Cody:
Yeah. I love this. When you guys think of holes in it, we’ll do another episode.

David:
I know. I mean, what if you don’t like coffee? That could be one problem with it.

Cody:
Tea.

David:
Yes.

Cody:
But I don’t like tea, so I do coffee.

Christian:
I had someone text me recently. They’re like, “London Fogs. I do London Fogs.”

David:
Is there a disease you can get from too much caffeine? That’s the one flaw in this whole model.

Rob:
Yeah, insomnia.

Christian:
Seattle’s going to be in trouble if that is the case.

Cody:
Seattle is already in trouble.

Christian:
That is also true. Maybe that’s the problem with Seattle. Maybe that’s how this all happened.

David:
So are you guys buying outside of Seattle because you think more people are going to be moving that want to stay in Washington, but they want to get out of city? Is that part of your-

Cody:
Buy in central Washington because the economy is at scale. We have some… Well, we have a significant market share in that area, and the stuff we don’t own, we influence.

David:
It as nothing to do with economics. It’s just economies of scale and simplicity, that you mentioned earlier.

Cody:
It’s very simple. People want to live there, and we mentioned this on the BiggerPockets episode, but people are happy. They take care of the streets, they take care of their yards. There’s pride of ownership. You will not find that in King County.

David:
Well, my thought would be the people that are pride of ownership folks are leaving the craziness that they see in some of the bigger cities and that’s where they’re going to go, and you just got ahead of it, so an emerging market in a sense.

Cody:
Absolutely, but again, I just bought the biggest deal in the best location I could. It doesn’t have to be central Washington. You buy based on cashflow for equity growth and you line up your deal, your debt and your equity, and as long as you have long-term fixed rate debt, cashflow and margin, you can buy anywhere you want. It could be in Seattle. That’s why we did the Tukwila deal, 4.5% down 3% interest. It’s 60% cash-on-cash.

Rob:
Nice.

Christian:
That one works.

Cody:
It still works.

David:
Are you going to be a commercial operator now? Are you going to get into multifamily?

Rob:
I’m going to need to listen to this episode a couple more times, really digest it, but yeah.

Cody:
The one nice thing, before we wrap up if we got one minute?

David:
Yeah.

Cody:
The nice thing about the commercial game, if you buy $1 dollar deal and you sell it for $2, what’s your ROI?

Rob:
100%?

Cody:
It depends. Most people are putting 40% down, so they’ll turn $400 into $1,000,004, net of fees, you got to net out of fees, but we put 5%, 10% down. We’ll turn our $50 to $100 grand into $1,000,050 to $1,100,000.

David:
Yeah, you guys are getting primary residence type debt on investment properties.

Cody:
But the beautiful part is the asset value. It’s easier to double the asset value. That’s what we’ve done with our 38 units. It’s worth over $4 million bucks, we bought it for $2 million. It was listed on the market for 13 years straight. It listed when I was eight, I bought it when I was 21.
It’s really easy to influence the valuation when it’s just controlled by the net income. That’s the beauty of it. It’s harder to do that on a RESI property, so if you’re doing it on a commercial-

David:
Oh, I see what you’re saying.

Cody:
… everyone’s putting 30%, 40% down.

David:
And they’re dependent on the comps around, that they have to go up to make money.

Cody:
Absolutely. If I can get it to operate better, then it goes up in value.

David:
Assuming cap rates don’t expand or something crazy that works against you, but at some point, that’ll probably stabilize too.

Cody:
However, if you can increase the net income high enough, in excess of everything that’s going on-

David:
You can overcome it.

Cody:
… you can overcome it. And if you’re putting 10% down and everyone else is putting 40%, your returns are 4X, everyone else has a return.

Christian:
And you get the same tax benefits that they would have, but with basically no money.

Cody:
So your cost SAG is four times as powerful.

David:
So debt’s not stupid, it’s just how you take on the debt.

Rob:
No, it’s super true, and that’s why we’re moving into development and stuff like that because the way we think about it is, like a glamping resort, let’s say 100 units, if you could increase your NOI by $100,000 bucks because you add food, maybe sell beer and wine on site, maybe you rent out kayaks, maybe you rent out whatever, it just increases the value of your property so much.

David:
Because you’re taking income without really additional expenses.

Rob:
Exactly. It’s just crazy how fast you can really build a machine if you’re really good at optimizing it.

David:
You know when I first learned that principle? This is going to sound silly to you. I was in college and I didn’t have a great grade, and I don’t remember why, but I remember the professor was like, “Look, if you write a paper on this, I’ll give you extra credit.” It might’ve even been in high school, and something clicked in my head when I realized, “This paper’s worth 10 points. So if I get a 10 out of 10, if it becomes a model of 100 and now out of 110, I got 10 more points, it’s not as significant as if I’m getting 10 points, but the base was only still 100.” Does that make sense? You could be at a C, like 70%, and if I get 10 extra points, it literally puts me up to a B, versus it would be a 1% increase if I got 10 out of 10 and the base went from 100 to 110.
Well, usually, in order to make more money with real estate, you have to buy more of it. You have to take on more debt, you have to take on more taxes, you have to take on more expenses in general. When you’re increasing NOI on a property that doesn’t involve having to put more money into it, it’s that same phenomena. I don’t know what mathematical term that would be, but when I realized that, I saw how powerful it was, and that’s what you guys have done here, is you figured out a way to increase the value of your property without taking on additional expenses to do it.

Cody:
And it’s not always just raising the rent. If you can make it more stable, you lower the cap rate and that’s your multiplier, and if you can lower the cap rate, which you can do in any given market, I don’t care. Some people say you can’t, but you absolutely can if you make the asset more stable. Someone will accept a lower return on a more stable asset. That increases your value even if rents can’t go up.

David:
That’s a good point. When I learned to understand that cap rates was just a function of demand for an income stream in that area, that’s all it is, you make it prettier, there’s going to be more demand. You make it easier, there’s going to be more demand. You make it more simple, like you guys are saying there’s going to be more demand. Now you can market yourselves as we’re able to actually change cap rates, which everybody else feels like they can’t do, in addition to the NOI, which can be done.

Cody:
Which is why on the resort, we’re focused on building systems. It is now an investible asset versus a job, cap rate way down.

David:
That’s exactly right. It’s more attractive if you’ve created systems. Someone else can buy it and they can just run with what you have.

Cody:
And if you can lower the cap rate 2%, 3% on multiple six figures of net income, the value goes up a little bit.

Rob:
Yeah, yeah.

David:
Rob, any questions? Is your mind blown? Your quaff is shivering right now.

Rob:
No, I love it. No, I’m in. I mean, that’s what I like. I mean, that’s what’s very appealing to me is that side of the cap rate conversation on commercial, because you have a lot of these Airbnb hosts that are like, “Yeah, my house made $100,000 dollars. I’m going to sell it to you at a cap rate and the house market value is $500, but because it nets $100, you have to pay me $900.” I’m like, “I’m not going to pay you, as a business, on one single short-term rental. Are you crazy? What happens when it’s regulated? It’s not a business anymore, but sell me a portfolio of short-term rentals, and then we can talk about cap rates.”

Cody:
Absolutely. And some people say that cap rates are irrelevant, that they don’t matter, but that’s your dividend expressed as a percentage, and if you just make sure your cost of capital is less than that, your cost of capital, which is your factor rate, not your interest rate, as long as that’s less than your cap rate, you make money on every dollar you borrow.

David:
That sounds like something you learned at one of these coffee talks.

Christian:
Yes.

David:
It’s really good stuff.

Rob:
I love it. Yeah, this is good. Yeah, bummed. Bummed, it’s over.

David:
Well, for people that want to find out more about you guys, where can they go? Christian?

Christian:
You can find me on Instagram @christianosgood. I’m lucky enough to have my own name, and you can check us out on our YouTube channel totally for free. It’s Cody and Christian Multifamily Strategy. Check us out there.

David:
Have you seen the movie with Bruce Willis, Unbreakable?

Christian:
I have not.

David:
The concept of Bruce Willis’s character can’t get hurt because Samuel Jackson’s character is hurt all the time.

Rob:
Yeah, unless he gets pushed into the pool, of course.

David:
Of course, right.

Rob:
Yeah.

David:
But the idea would be that this yin and yang thing, if someone gets a lot of something, someone else somewhere doesn’t, I’m wondering if there’s an Os-bad family running around out there that just has terrible luck because the Osgood’s are just crushing it right now with their real estate investing.

Christian:
Well, you just gave away my password on half my stuff, so thank you, David.

Rob:
We’re going to rebrand you to Christian Os-great. How about that?

Christian:
There we go.

Cody:
Christian Os-tastic.

David:
Cody, how about you?

Cody:
Yeah, my Instagram is @doingcodythings, because I’m, in fact, always doing Cody things.

Rob:
Great.

David:
Yeah, you were responsible for that nickname, weren’t you?

Christian:
I got the T-shirt. We actually had a boss, the same guy.

Cody:
He did not like me after I started buying more stuff, and so to spite him, he bought a shirt that said, “I’m Cody doing Cody things.”

Christian:
To match Cody’s shirt. And then we branded that, and then people who watch our YouTube channel started buying it on Amazon.

David:
You should get one that says, “Iron sharpens iron.”

Christian:
Oh gosh, that would be ironic.

Cody:
Ooh, that’s a deep cut right there.

Christian:
There we go.

Cody:
Yeah.

David:
Do you guys have a website or anything where people can go to learn about your partnership?

Christian:
They can, Multifamilystrategy.com.

David:
There we go. So check that out everybody. Rob, where can people find out about you?

Rob:
You can find me over on the YouTubes. I teach all things real estate, entrepreneurship, Airbnb, the pursuit of happiness and everything in between. You can also follow me on Threads if you want to be hip, and on Instagram, if you just want to be the status quo, @robuilt.

David:
How much of Thread’s popularity is just Twitter backlash? What do you think?

Rob:
Not a lot, I don’t think.

David:
You think it’s legit?

Rob:
Yeah. Well, I think it’s more based on Instagram popularity, but I think, yeah.

David:
I just feel like a disproportionate amount of comments on Threads that I’ve read are all just, “We hate Twitter.”

Rob:
No, I think a lot of people don’t like Threads too, but I like it.

David:
That’s normal being a human being, finding things you don’t like.

Rob:
Yeah.

David:
All right. You can find me at DavidGreene24 on all social media and DavidGreene24.com, and for now, I’m actually monitoring my own chat option, so go to the website and let me know your questions, and I’ll do my best to get back to them.

Rob:
Okay. Well, what’s the… DavidGreene24.com?

David:
That’s it.

Rob:
Great. I’m going to go chat with you right now.

David:
I’ll be able to watch you doing it. All right, guys. Thank you very much for being on the show.

Cody:
Thank you, this was awesome.

David:
This is David Greene for Rob, check his Threads, Abasolo. Signing off.